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Oil ETFs Jump on Renewed Hopes of OPEC Cut

After a freefall since the U.S. presidential election last week, oil price bounced back strongly, jumping nearly 6% in Tuesday’s trading session, the biggest one-day gain in six months. This is primarily attributable to renewed hopes of a cut in production by the Organization of the Petroleum Exporting Countries (OPEC) and reports of falling U.S. shale production.

In September, the 14-member cartel proposed to cap its oil production for the first time in eight years. It is looking to reduce output by about a million barrels per day to 32.5–33 million barrels per day from the current 33.2 million barrels per day. The agreement is expected to be finalized in the meeting slated for November 30 in Vienna (read: OPEC Surprises With Production Cut: Energy ETFs Soar).

Most OPEC members are expected to engage in a last minute effort to bring the world’s top producers together to restraint production that has contributed to a rally in oil price. With regard to these efforts, some positive developments have started taking place. Saudi Arabia is ready to cut its production while Iran is looking to cap at the current level of nearly 4 million barrels a day. Iraq is also thinking of limiting production.

The U.S. Energy Information Administration (EIA) expects oil production from the seven shale regions – Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica – to fall by 20,000 barrels a day in December to 4.498 million barrels a day, the lowest level since April 2014. Further, militant attack on three oil pipelines in southern Nigeria provided an additional boost to the oil price. This is because the violence will likely disrupt production of 300,000 barrels per day in the nation.

While the returns of these funds are tied to the oil price, they are different in some way or the other. This is especially true as OIL delivers returns through an unleveraged investment in the WTI crude oil futures contract while BNO provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. USO seeks to match the performance of the spot price of light sweet crude oil WTI while DBO provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return (see: all the energy ETFs here).

Meanwhile, leveraged oil ETFs also shot up with VelocityShares 3x Long Crude Oil ETN and ProShares Ultra Bloomberg Crude Oil ETF (UCO - Free Report) rising 14.2% and 9.3%, respectively. The former seeks to deliver thrice the returns of the daily performance of WTI crude oil while the latter tracks the two times daily performance of futures contracts on WTI crude oil.

The outlook for the oil market largely hinges on the historic OPEC deal. As per the International Energy Agency (IEA), the oil market will regain its balance earlier than expected should deal be finalized. The deal would be a huge boon to the energy sector, as it will end the two-year crude-oil rout and stabilize the oil market. It will revitalize growth in the battered energy sector and lift the economies of the oil-rich countries like Russia and Saudi Arabia (read: How to Trade the Oil Rush with ETFs).

On the contrary, IEA warned that the global oil market will remained flooded and will enter the third consecutive year of supply glut in 2017 without a deal. This is because production from the OPEC increased 230,000 barrels a day to a record high of 33.83 million barrels a day in October and is expected to remain high in November as well.

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